Loaning money is a central process in the banking industry. The process banks follow when making a decision as to whether or not to loan money to an entity or individual is often related to a credit score. In a typical scenario, a bank scores the applicant and compares that score to some pre-determined cutoff score. The applicant's score is determined by several factors depending the type of credit requested, but once the method of determining an applicant's score is chosen, it is typically applied uniformly for that type of loan. In addition, the cutoff score is determined for each type of credit offered by the bank. Often, the cutoff score is determined based on a relatively subjective understanding of business conditions, and is updated only as business conditions change significantly.
The credit scoring process results in a number (in practice, an integer) that represents the credit worthiness and credit history of the applicant. The process of determining the applicant's credit score is deterministic and can be viewed for purposes of this disclosure as a known parameter or constant. The cutoff score, by contrast, is typically an arbitrary number derived by some methodology to help the bank achieve its business goal. The cutoff score is chosen with the help of a credit scorecard (in chart or table form) that is developed using a broad range of industry data about “pass” rates and “bad” rates for a particular type of loan. In most cases, the bank's goal in choosing a cutoff score is to maximize profit by balancing loan volume and loan quality with the loss that results from making bad loans.
In its basic form, a credit scorecard has a list of scores in sequence, an estimation of what percentage of the universe of all applicants will have scores above that score (pass rate), and an estimation of what percentage of the universe of loans to applicants with scores above that cutoff score that will go delinquent sometime during the life of the loan (bad rate). A portion of a hypothetical scorecard 100 is illustrated in FIG. 1. The central rows of the scorecard are omitted for clarity. Column 102 shows the scores, column 104 shows the number of applications in the sample on which the scorecard is based that fall into the score range identified by the score, column 106 shows the cumulative number, and column 108 shows the cumulative percentage (pass rate). Columns 110, 112, and 114 show the percent bad rate, number of bad applications, and cumulative percentage of bad applications (bad rate) for a score, respectively. Note that the first row includes all scores below a particular score, which has been identified as the lowest score the bank is interested in with respect to potential loan candidates.
Credit scorecards for various types of loans are typically developed by independent credit agencies, such as Fair, Isaac & Company, Inc. These scorecards are kept confidential, but sold or licensed to banks for a fee under condition of confidentiality. Sometimes, a particular credit agency's scorecards will contain additional data pertaining to information that is maintained and studied “exclusively” by the particular credit agency. In any case, the general format, use, and meaning of credit scorecards are well understood by individuals in the financial loan industry.